IMF Market Insights

Today the IMF released its semi-annual Global Financial Stability Report. The report shows that although near-term financial stability risks have remained contained, mounting vulnerabilities could worsen future downside risks by amplifying shocks. Such shocks have become more probable because of the widening disconnect between elevated economic uncertainty and low financial volatility. 🔹 Read the report: https://lnkd.in/eaXy5a6R 🔹 Listen to the podcast: https://lnkd.in/e_NaBUjj 🔹 Read the executive summary: https://lnkd.in/eNV8gRbw 🔹 Read the blog: https://lnkd.in/eBW-4i7e 

Since the Federal Reserve initiated its easing cycle in September, US yields have surged significantly. The rise in yields goes hand-in-hand with elevated interest rate volatility, which has persisted over the past couple of years—returning to levels reminiscent of the period before the Great Financial Crisis, as major central banks shifted from forward guidance to data dependence. A key outcome of this volatility is the decompression of term premia in Treasury markets, which reflects the additional compensation investors require for bearing interest-rate risk on long-dated US bonds. IMF staff analysis from the latest October 2024 Global Financial Stability Report indicates that the spillover effects of this decompression of term premia in the US are impacting not only major advanced economies but also, increasingly, emerging markets. As shown in the chart, spillovers to local currency bond markets across regions are particularly elevated compared to historical levels—especially in the Central and Eastern Europe, Middle East, and Africa (CEEMEA) region. Consequently, if yields on long-dated US Treasuries continue their sharp rise, it may become more costly for governments in these emerging markets to issue debt. 🔹 Read more in the Global Financial Stability Report: https://lnkd.in/eaXy5a6R Jason Wu; Nassira A.; Sheheryar Malik; Mustafa Oğuz Çaylan

An increasing number of banks around the world have begun using synthetic risk transfers (SRTs) to manage credit risk and lower capital requirements. Globally, more than $1.1 trillion in assets have been synthetically securitized since 2016, of which almost two-thirds were in Europe, as shown in the chart. SRTs move the credit risks associated with a pool of assets from banks to investors through a financial guarantee or credit-linked notes while keeping the loans on banks’ balance sheets. Through this credit protection, banks can effectively claim capital relief and reduce regulatory capital charges. However, the transactions can generate risks to financial stability that need to be assessed and monitored. First, SRTs may elevate interconnectedness and create negative feedback loops during stress. For instance, there is anecdotal evidence that banks are providing leverage for credit funds to buy credit-linked notes issued by other banks. From a financial system perspective, such structures retain substantial risk within the banking system but with lower capital coverage. Second, SRTs may mask banks’ degree of resilience because they may increase a bank’s regulatory capital ratio while its overall capital level remains unchanged. Increased use of SRTs may reflect inability to build capital organically because of weaker fundamentals and profitability performance. Furthermore, overreliance on SRTs exposes banks to business challenges should liquidity from the SRT market dry up. Finally, although lower capital charges at a bank level are reasonable, given the risk transfer, cross-sector regulatory arbitrage may reduce capital buffers in the broad financial system while overall risks remain largely unchanged. Financial sector supervisors need to closely monitor these risks and ensure the necessary transparency regarding the SRTs and their impact on banks’ regulatory capital. 🔹 Read more in the IMF’s latest Global Financial Stability Report: https://lnkd.in/eaXy5a6R Gonzalo Fernandez Dionis, CFA, Yiran Li, CFA, Silvia L. Ramirez

The IMF is excited to announce the development of a modern unified portal for accessing macroeconomic and financial data. From October 16 to November 22, we're inviting data enthusiasts outside the IMF to test the beta version of the IMF Data Portal (coming in 2025) and share their feedback. Check out the guidance below to explore the new features and let us know your thoughts—we value your insight! -Visit https://betadata.imf.org -Perform suggested actions from the testing guidance (https://lnkd.in/euY9MDaE), or your own use cases -Send feedback to the IMF team via the survey (https://lnkd.in/eJKD9Dm6) For support or data questions, reach out to datahelp@imf.org. Please be aware that there is limited data in the beta portal; data is not final and should not be used for actual work. 

Cross-border payments are the lifeblood of the global economy, facilitating remittances, business transactions, and the movement of capital that fuels development. But the infrastructure is creaking. And it is missing for many people around the world. In a recent speech, IMF Financial Counsellor Tobias Adrian outlined how the IMF is helping the G20 to enhance cross-border payments, to make transactions faster, cheaper, more transparent, and more inclusive. “At the IMF, we are acutely aware of the macroeconomic implications of improving cross-border payments. Lower transaction costs can boost trade and the growth of small and medium businesses constrained by their domestic market size. Lower costs can also foster the integration of markets, offering more risk-sharing opportunities to households and firms. And concentrating foreign exchange flows and allowing for coincident settlement can strongly improve market efficiency." "Improving cross-border payments also comes from fostering competition among financial and payment firms. This will benefit end-users and especially underserved populations. However, we must manage potential risks, including increased foreign asset exposures and the potential for currency substitution." "We must also ensure that improving payment links between countries leads to greater integration—not fragmentation. Otherwise, we risk fostering exclusive “islands” with poor connections in between.” 🔹 Read the full speech:  https://lnkd.in/e9ibCtEA

Links between crypto-asset markets and core financial markets are increasing. New developments could introduce complex regulatory and systemic risk challenges, as connections evolve between traditional financial systems and the volatile crypto-asset market. The financial industry itself continues to evolve, with asset managers and banks experimenting with distributed ledger technology (DLT), including tokenization. While DLT-based tokenization does not pose a material risk to financial stability currently, it has its own financial stability vulnerabilities. This fast-changing landscape demands robust regulatory frameworks to mitigate risks while harnessing potential benefits of increased efficiency, accessibility, and innovation in the financial sector. A new report by the staff of the IMF and Financial Stability Board 👉 G20 Crypto-asset Policy Implementation Roadmap 👈 reflects on the importance of effective, flexible, and coordinated implementation of a comprehensive policy response for crypto-assets. Prepared at the request of the G20, the Roadmap identifies main challenges, as well as the next steps. 🔹 Read the report: https://lnkd.in/eNNmjieG Agnija J., Yaiza Cabedo, Gerardo Uña, Nadine Schwarz, Marianne Bechara, Pamela Cardozo, Nobuyasu Sugimoto, Parma Bains, Padma Sandhya Hurree Gobin

The economy is embedded in, and dependent on, nature. Yet economic activity is degrading nature at an unprecedented pace. Interacting with climate change, nature loss and transformation generates significant threats to the global economy and financial system. However, work on the implications of nature-related risks for macroeconomic and financial sector policies remains at an early stage. A new IMF Staff Climate Note proposes a conceptual framework for understanding nature-related risks by mapping out macroeconomic transmission channels, emphasizing their impact on the economy and financial systems through “double materiality.” Through empirical analysis, the Note finds that nearly 38 percent of bank loans of the 100 largest global banks are to harmful subsidies-dependent sectors and 44 percent are exposed to conservation areas under the Global Biodiversity Framework, and that industries most exposed to nature degradation are not well prepared to manage these risks. 🔹 Read the Note’s takeaways for macroeconomic and financial sector policies and frameworks: https://lnkd.in/egxNM2AW Charlotte Gardes-Landolfini, William Oman, Jamie Marie Fraser, Mariza Montes de Oca León, PhD, Yujia Yao

This week, the IMF released its semi-annual report on global financial stability. Since the April 2024 Global Financial Stability Report, global economic activity has moderated, and inflation has continued to slow. Near-term financial stability risks remain contained. With monetary easing under way among major central banks, financial conditions have remained accommodative, emerging markets have remained resilient, and asset price volatility has stayed relatively low, on net. However, accommodative financial conditions that keep near-term risks at bay also facilitate the buildup of vulnerabilities—such as lofty asset valuations, the global rise in private and government debt, and increased use of leverage by nonbank financial institutions—which raises risks to financial stability in the future. 🔹 Read how these mounting vulnerabilities could amplify adverse shocks: https://lnkd.in/eaXy5a6R 

UPCOMING EVENT: Digital Currency Revolution: Architecting the Future of E-Money Systems WHEN: Tuesday, Oct 22, 2024 | 4:30 PM - 5:15 PM ET WHERE: IMF Headquarters, Washington, DC | HQ1 Atrium HQ1-1-700 Or join virtually: https://lnkd.in/dBRpHFbE? OVERVIEW: How does the IMF help build capacity among financial authorities to harness the benefits of electronic money (e-money)? How are the risks managed? Join us for a discussion that will introduce key concepts of e-money regulation, supervision, and oversight. It will also cover broader outreach delivered by the IMF through fintech regulation regional workshops, as well as the IMF’s e-money workshops. The session will feature the perspectives of the Central Bank of Trinidad and Tobago, the Central Bank of Guatemala, and the Consultative Group to Assist the Poor on their specific challenges and working with the Fund to improve capacity. PANELISTS: 🔹 Gita Gopinath, IMF First Deputy Managing Director 🔹 Alvin Hilaire, Governor and Chairman, Central Bank, Trinidad and Tobago 🔹 Alvaro Gonzalez Ricci, Governor, Bank of Guatemala 🔹 Sophie Sirtaine, Chief Executive Officer, Consultative Group to Assist the Poor MODERATOR: 🔹 Dominique Desruelle, Director, IMF Institute for Capacity Development

More efficient or more volatile? The adoption of the latest iterations of artificial intelligence by financial markets can improve risk management and deepen liquidity; but it could also make markets opaque, harder to monitor, and more vulnerable to cyber-attacks and manipulation risks. These new innovations will likely further AI's ability to quickly rebalance investment portfolios, which will in turn lead to higher trading volumes. In preparing the analysis for Chapter 3 of the latest Global Financial Stability Report, market participants were surveyed and concurred that high-frequency, AI-driven trading is expected to become more prevalent, particularly in liquid asset classes like equities, government bonds, and listed derivatives. They foresee greater integration of sophisticated AI in investment and trading decisions within three to five years, although a “human in the loop” approach is expected to persist, especially for large capital allocation decisions. Evidence of these changes is already being seen in the exchange-traded fund market. Although currently small, AI-driven ETFs show a significantly higher turnover compared to other ETFs. While a typical actively managed equity ETF turns over its holdings much less than once a year, AI-driven ETFs do so about once a month. If widespread, such strategies may in the future mean deeper, more liquid markets which are good for investors. But they could also contribute to market instability: several AI-driven ETFs saw increased turnover during the March 2020 market turmoil, suggesting the potential for increased herd-like selling during times of stress. 🔹 Read Chapter 3: https://lnkd.in/exb5RKgs